Toursim Tax Revisited

I wrote a blog earlier in the year about the campaign to reduce Tourism Tax (effectively a cut in the VAT rate to 5% for tourism). In the last couple of weeks, a group of MPs led by Stephen Lloyd, Liberal Democrat MP for Eastbourne, have put forward a motion to the Chancellor, Philip Hammond, to review the benefits of such a cut in the VAT rate on the British economy. The Campaign has also been backed, for the best part of two years, by the British Hospitality Association (BHA), following a report by Professor Adam Blake (a treasury adviser) who concluded that cutting tourism VAT to 5% is “one of the most efficient, if not the most efficient, means of generating GDP gains at low cost to the Exchequer”.

Tourism is the fourth largest industry in the UK; therefore, whatever the government can do to assist in its growth must be seen as a positive contribution to the UK economy. The reduction in VAT to 5% on tourism will help the UK to become more competitive against Europe’s other highly visited countries. Independent research on the subject suggests that the UK would see the benefit of increased spending due to lower prices, as well as further investment in the hospitality sector. Investment may come from current business owners either expanding their existing businesses, or opening new businesses due to increased cash reserves.

Tourism Tax in the Rest of Europe

Around 33 countries in Europe have a reduced VAT rate on tourism. Whilst the UK continues to charge 20% VAT on tourism, the rates in some of the other European countries are as follows:

Germany 7%

Ireland 9%

Spain and Italy 10%

The UK rate is twice of that of other European countries. The suggested cut would be on both accommodation and attractions around the UK.

Vernon Hunte, campaign manager of the Campaign to Cut Tourism VAT, said: “A reduction in the rate of tourism VAT to 5% would contribute £4.6bn to the Exchequer, and lead to a reduction in the UK’s balance of trade deficit by £23bn over 10 years”.

The figures above show the benefits to the UK industry as a whole, but it is also the UK workforce who would potentially benefit from the reduction due to the creation of new jobs. I identified in a previous blog the potential staff shortage that the UK could face after Brexit, following the proposed restriction in free movement between EU countries. In some of the bigger chains that operate in the UK, up to 90% of job applications are currently being received from non-UK nationals. Therefore, bringing additional funding into the sector would allow those businesses to invest in more training and potentially increasing salaries to entice more people form the UK to work. This would help in the long run to solve the problems that are being forecasted to occur.

Benefits of Reducing Tourism Tax

In summary a reduction in tourism tax could have the following benefits:

increased employment levels in the sector

higher levels of expenditure on both existing and new ventures

both of the above will lead to a higher tax take for HMRC due to increased PAYE and corporation tax liabilities

an increase in profitability in the hospitality sector will have a positive impact on the profitability of other sectors

At present there has been no response from the Chancellor on the latest motion to reduce tourism tax. I look forward to at least an opening of dialogue on the matter as the benefits can clearly be seen. At the moment, the hospitality sector could definitely do with a further boost and I will be keeping a close eye on future developments. In regards to other positive changes affecting the hospitality sector, we have produced an update of the recent budget announcement which you can download here.

If you are worried about the implications of VAT on your business then contact our expert, Adam on adam.moody@raffingers.co.uk or 020 8418 2683.